Leading Air Transport Services Company Receives Turnkey Solution For The Accounting, Valuation, And Financial Reporting Of Stock Compensation Plan
The Challenge
The subject company (the “Company”) provides air transport support services to customers throughout the U.S. at fixed-base operator locations.
To align ongoing performance and value growth with compensation, the Company granted certain employees stock options as part of its long-term incentive plan. The stock options vest partially over time and partially following the achievement of various performance and market conditions.
The Company did not have personnel with the necessary accounting or valuation expertise to properly recognize the stock options in their audited financial statements. Application of accounting guidance related to stock compensation can be complicated when awards contain multiple vesting conditions, as well as other unique forfeiture and settlement provisions. Further, determining the fair value of awards containing complex vesting structures requires sophisticated valuation techniques.
The Solution
The Company engaged Opportune to assist with the accounting, valuation, and financial reporting of the stock options. Opportune pairs financial modeling and valuation experts with technical accounting professionals to deliver a high-quality, expansive set of services to their clients. Specifically, the deliverables Opportune provided for the Company to achieve its objectives included the following:
- A technical accounting memorandum providing an overview of the inventive plan, the stock option, and agreements, as well as other governing documents. The memorandum concluded on the appropriate initial and subsequent accounting, which required consideration of equity vs. liability classification, considerations regarding appropriate measurement dates, identification of vesting conditions, and requisite service period for proper compensation expense recognition.
- A valuation report indicating the fair values for the stock options at the applicable measurement dates, which required the use of both Black-Scholes option pricing models, as well as the use of a Monte Carlo simulation model to capture the impact of the market vesting condition.
- An expense attribution model calculating the appropriate expense to recognize the initial period by the recipient, along with proposed journal entries.
- A draft of the footnote disclosures was included in the Company’s audited financial statements, along with a completed GAAP checklist.
Additionally, Opportune guided the Company through the deliverables to ensure it had a complete understanding of everything to meet its internal control requirements for the use of a specialist.
Business Impact
- The Company had assurance that the work was done in accordance with U.S. GAAP due to robust documentation identifying all accounting issues and citing applicable U.S. GAAP to support conclusions, reducing financial restatement risk and/or internal control and process ramifications.
- The independent audit review was streamlined. The audit specialists reviewed the deliverables with zero comments. This is often the case due to Opportune’s extensive experience working with specialists at all Big 4 and many regional audit firms concerning stock-based compensation.
- The Company continues to outsource this function to Opportune for future grants and plan modifications due to it being a cost-effective solution for this activity.
